Stock Chartist

Commentary and recommendations about the stock market, sectors and individual stocks from a chartists perspective. Observations are based on the belief that "at their core, fundamentals are subjective but momentum is fact."

Main menu

Post navigation

November 10th, 2009

I first started writing about the critical area between 1150-1200 on August 7 (wow, doesn’t seem like 3 months ago), the day the Index broke through 1000 for the first time since the March 9 bottom and closed at 1010.48, or 7.6% below today’s close. In “Difference Between Correction/Consolidation and Reversal” I wrote,

“The recovery from the Tech Bubble Crash saw a major correction that lasted most of 2004 between 1050-1150; my interim target for the first one …… is the 1150-1200 area. What will this correction look like? It could be a wedge, a pennant, a channel or merely a return to a trendline or moving average … but it won’t be a head-and-shoulders.”

Many readers then were skeptical and wondered whether the market would be able to cross above the 300-DMA or to stay above 1000. But the market labored ahead and three successive surges (the current surge since November 1 will the fourth) each ended at successive new highs.

A couple of days ago, I outlined a “game plan” which appears so far to be working and close to hitting the goal of 1125 (I beg some lea way to extend the target range to 1150). As the market approaches the target, it’s time to start speculating about what might come after. To repeat, this is mere speculation and guesswork as no one can predict the future but we have to some view so as to develop an action plan. If the view turns out to be wrong (and we’ll know when that is), we modify the action plan:

The market begins to stall out in December as:

the door for the sidelines-money slams shut for the year

tax selling begins to capture losses and record gains in anticipation of possible higher 2010 tax income rates

The 1150-1200 is a critical area for past pivot points where the market turned in 1998, 2001, 2002, 2004, 2005, 2006 and 2008. These pivots occurred both when the market was trending up and down.

The turn is usually caused by an economic catalyst and one that could fit the bill perfectly would be:

The $US Dollar firming and possibly reversing its descent.

The “Soft Dollar Trade” (buying foreign currencies, gold and commodities), considered by many as “over-crowded”, begins to unwind and the market begins to decline.

A logical target for the bottom of this correction is the neckline of the market’s inverted head-and-shoulders bottom, or approximately 950 in the S&P 500, a 17% decline from the high.

The decline fall within the definition of a correction falling short of the 20% required to considered a “Bear Market”.

The Index will find support on the 200-DMA, the crossing of which is a key indicator identifying Bull and Bear Markets

The 200-DMA will have crossed the 300-DMA by then

The 300-DMA will have turned up, the final hurdle before the book on the Crash can be finally closed.

For those who are habitual chartists and think in terms of graphs rather than words, here’s a depiction of what the above scenario might ultimately look like (click on image to enlarge):Many out there will scoff and say this is pure fiction, nothing more than reading a Ouija board. But is it any more fictional than some of the stories that are spun by the “talking heads”. They represent prestigious firms with large research departments but I write this blog. We’ll follow the future unfolding and learn who’s projection, given when, winds up being closer in the end.

The corrrection or consolidation could be short lived as the true top of this bull market could be nearer 1350 with the neckline at 950 being half-way between the bottom at 660 and the top on a percentage basis but a potential 17% correction demands an action plan. Help us all out. What will the market correction look like and what actions will you be taking when the arrives?

Note: I refer the scoffers out there who brush off this exercise you to “Fairy Tale with a Happy Ending“, something I wrote on November 6, 2008. I inserted a chart in that article similar to the one above. That chart turned out to be uncannily similar to the market’s actual ultimate course with the major difference being that it took longer to get here than I had projected. So be careful in rejecting this exercise too quickly.

Subscribe below or click here to learn more about help for navigating turbulent markets.

we may have to come down again & run up to 1150 in December, according 2003 & 2004, right?

Joseph Meth

Not sure about that….my feeling is that we'll have only one chance and then the next bigger trend (or wave) will be down. I'm focusing more on level than on time so it could come before month-end, in December or right after New Years. I feel a turn is imminent.

Anonymous

any comment on the last couple days run to new highs with very very low volume. i am guessing you are expecting a big volume surge here soon?

Joseph Meth

Seems to me the low volume underscores how tired this market is and that the bulls are exhausted. Prime conditions for a pullback.

Anonymous

Looks like the S&P may be putting in a double-top here if we can't close much above 1100 soon. Pretty strong divergences are present.

This would follow the Russell, and the calculated retracement would be right in that 950 area.

Hope you're right, Minne, but unfortunately I don't think you are. But that's what makes a market. We'll just have to wait and see.

In the meanwhile, I'm putting on some hedges and remaining on alert for a possible quick and sudden downdraft described here before the trot up to your 1295 (or my higher 1350) just to stay on the safe side.

Minnesotalee

The market cannot turn on a euro, it needs accumulation in the tech pattern and a break downwards. On the contrary the present breakout is on the upside and there is no way it can be reversed. Of course it could be different this time according to the bears. We will however get pullbacks but this technically is very positive, Hedging by any means from here is wasting $$$. You should use those $$$ inorder to buy some calls. My charting is independent of time and volume and based solely on momentum and pattern statistics. This one assumes 88% probability of a continued upward momentum with some inconsequential pullbacks.

basil2004

Head and shoulders forming.We are in the head area.Neck 100 points under your mark.Right shoulder where left shoulder then we double bottom in 2010 somewhere.

Joseph Meth

Not sure if I can locate the neckline because I'm not sure what you're referring to as my "mark" but, I agree, the market is in an intermediate topping process in anticipation of a consolidation period.